Intraday Liquidity Facility for the Implementation of Circular 266 thru the Improved Interbank Call Loan Funds Transfer system (MIPS2)

CIRCULAR LETTER Series of 2001

To            :  All Banks and Non-Bank Financial Institutions Performing Quasi-Banking Functions

Subject    :  Intraday Liquidity Facility for the Implementation of Circular 266 thru the Improved Interbank Call Loan Funds Transfer system (MIPS2)

In its Resolution No. 1139 dated July 19, 2001, the Monetary Board, amended its Resolution No. 480 dated March 26, 2001 which approved the establishment of the Intraday Liquidity Facility (ILF) to support the implementation of Circular 266 thru MIPS2. Circular 266 amended the rules on settlement of transactions involving interbank loans and government securities under repurchase agreements with the Bangko Sentral ng Pilipinas (BSP) in connection with its open market operations. The Circular prescribes settlement of these transactions gross, on trade-for-trade basis and with finality, subject to the availability of balances in the deposit reserves maintained by banks and non-bank financial institutions with quasi-banking functions (NBQBs) with the BSP.

BSP recognizes that there are interbank transactions, other than check clearing, that are still settled on net basis. These interbank transactions include secondary trading of government securities and peso-netting arising from $-Peso swaps. The ILF provides the, smoothening mechanism in the settlement of these interbank transactions, which are not covered by Circular 266 but could cause a failure of settlement of transactions under MIPS2. The operation of the ILF is considered part of the BSP's open market operations.

The basic features of ILF are described in this document. The timeline and procedures are shown in Annex 1.

1.   Establishment of BSP-ILF-Principal Securities Account and Client Securities Account for each participating bank/NBQB with BTR-ROSS. — The BSP-Accounting Department (BSP-AcD) shall open a RoSS Principal Securities Account (to be named BSP-ILF) and Client Securities Account (CSAW) for each participant (to be named BSP-ILF — Name of Seller/Institution). To establish the CSA-ILF, each RoSS member participating bank/NBQB shall instruct the Bureau of Treasury (BTr) to move from its account with BTr-RoSS to the BSP-ILF account the pool of peso denominated government securities to be set aside. Non-RoSS participants must first accomplish the required documents for RoSS membership prescribed by BTr. The instruction shall come in the form of " Confirmation of Transfer of Government Securities Sans Consideration" (COT-SC). (Doc. No. 1))

a.   All participating banks/NBQBs shall submit to BTr-RoSS the CSA-ILF file securities that shall constitute the initial inventory of securities in diskette form using an Excel worksheet in accordance with the signed form schedule shown in Annex 2. The CSA-ILF e-file shall be supported by a signed COT-SC. In case discrepancies are detected by BTr in the contents of the CSA-ILF e-file, the whole file shall be rejected.

b.   After updating the RoSS for the instructions from the participating banks /NBQBs, BTr shall transmit the initial CSA-ILF e-file of individual participants to the BSP via cc:Mail addressed to mailbox "BSP-ILF" and to the individual participants.

2.   Eligible Securities — Only government securities listed below that are free and unencumbered shall be eligible for the ILF. The securities shall be booked under either "Investments in Bonds and Other Debt Instruments (IBODI) — ILF" or "Trading Account Securities (TAS) — ILF".

a.   Peso-denominated issues of the National Government (NG) with remaining maturity life of at least eleven (11) days to ten (10) years, including Special Series Treasury Bills used as liquidity reserves under Circular 10.

Special Series Treasury T-Bills used as liquidity reserves under Circular 10 should first be released by the ILF participants before said securities can be transferred to their CSA-ILF account by formally advising RoSS on such transfer.

b.  US$ denominated bonds issued by the NG with remaining life of at least eleven (11) days.

3.   Intraday Bank Limit — Banks/NBQBs shall set their individual ILF limits based on the amount of government securities delivered to the CSA-ILF pool.

4.   Valuation of Securities — The government securities in CSA-ILF shall be valued based on the 11:16 A. M. fixing rates on the last banking day of the week when the documents are submitted to BSP-AcD, from applicable Bloomberg's MART pages. Securities that are not quoted in said MART pages shall be valued based on the price to be mutually agreed by BSP-Treasury Department (BSP-TD) and the participating bank/NBQB.

BSP shall adopt the following valuation guidelines for the Peso-denominated government securities:

Tenor(Remaining Life)

Valuation

Up to 182 days

90% of market value

More than 182 days but less than 5 years

80% of market value

More than 182 days but less than 5 years

80% of market value

5 years up to 10 years

70% of market value

5.   Margins — Margins shall be applied based on the remaining life of the security and on existing procedures of the BSP-TD.

6.   Access to ILF and Repayments of O/N-RP — At the start of the banking day, participating banks/NBQBs shall sell to BSP the securities in the CSA-ILF pool based on the value established in Section 4. BSP shall credit the proceeds of the sale to the respective demand deposit (DD) accounts of the seller with BSP (Doc. No. 2). At 5:30 P.M., BSP shall sell back the securities at the same price in accordance with the guidelines stated below.

a.   In case the DD balance is not sufficient to cover the purchase transaction, BSP-TD and the participating bank/NBQB shall mutually agree on either of two options:

i.    BSP-TD shall extend an overnight repurchase agreement (O/N RP) at 600 basis points over BSP's lending rate for the day.

ii.   BSP-AcD shall sell back to the participating bank/NBQB only to the extent of the DD balance and the bank shall issue an instruction to BTr to transfer the securities from the CSA-ILF of the BSP ILF principal securities account to BSP-TD regular principal securities account using Confirmation of Sale (Doc. No. 3)

b.   The O/N RP shall be paid not later than 11:00 A.M. on maturity date. Unpaid O/N-RP shall be converted into an absolute sale to BSP of the collateral.

7.   Changes in Securities in the CSA-ILF Pool — Participating banks/NBQBs may increase or reduce their intraday bank limit by submitting to BTr an adjusted CSA-ILF e-file not later than 12:00 noon on the last banking day of the week. BTr shall post the adjusted CSA-ILF file and transmit the updated CSA-ILF e-file not later than 9:30 A.M. of the immediately following banking day after date of receipt from the participating bank /NBQB.

8.   Transaction Fee — BSP shall collect a commitment fee of 20 basis points per annum on the intraday bank limit and transaction fee of P100.00. The cost of maintaining the CSA-ILF to be charged by BTr shall be borne by the participating bank/NBQB.

9.   System for Monitoring Movement of Securities — The BSP-AcD shall maintain the CSA-ILF file in tandem with the BSP Financial Accounting System (FAS). The CSA-ILF file shall be updated for the following transactions:

a.   Use of securities as collaterals of O/N-RP

b.   Transfer from the BSP-ILF to the BSP-TD principal account with BTr-RoSS on account of an absolute sale evidenced by the issue of Confirmation of Sale by the bank/NBQB and the Confirmation of Purchase (Doc. No. 4) by the BSP-TD.

10.  Availability of the Facility — The ILF shall be available in its fully automated form after completion of the user acceptance testing by market participants, BSP and BTr and upon signing of the memorandum of agreement by and among BSP, BTr and the Bankers Association of the Philippines in behalf of its members. Participating banks and NBQBs shall sign individual participating agreements.

FOR THE MONETARY BOARD

RAFAEL B. BUENAVENTURA Governor